The EU just took a massive step in giving regulators the power to break up the banks

Police watch fire burning next to the entrance to Bank station outside the Bank of England as anti capitalist and climate change activists demonstrate in the City of London
Getty
The European Union just agreed to a preliminary deal that gives the 28 members' regulators the extraordinary power to break up the banks if they wanted to.

One of those is banning the banks from making financial bets using their own money - also known as proprietary or prop trading. Other measures agreed in the preliminary deal include the banks having to prove to regulators that their investment banking activities do not threaten the financial stability of the country's financial system.

In other words, regulators and lawmakers want to prevent the cataclysmic events of the credit crisis which stemmed from highly risky investment banking products - mortgage-backed securities. The new plans are designed to prevent banks derailing the global financial system again by making trading activities a lot more supervised and less risky.

The proposals were initially tabled by the member of the European Commission responsible for financial services policy between 2010 and 2014 - Michel Barnier.

Since the onset of the crisis in 2008, the Commission has been at the forefront of efforts to create a safer and sounder financial sector.

I have now delivered 28 proposals to better regulate, supervise, and govern the financial sector and a more integrated, less fragmented single market. So that taxpayers no longer foot the bill when banks make mistakes. Ending the era of massive bail-outs.

And in the eurozone, for those countries which are more interdependent, creating the banking union to break the vicious circle between banks and their sovereigns. How? By centralising the delivery of EU-wide rules for the eurozone. But these rules are not only about dealing with today's crisis and avoiding a future crisis.

They are also essential to create long-lasting financial stability: the pre-condition so banks can lend to the real economy. To consolidate the economic recovery. For sustainable jobs and growth.

However, after he left the European Commission, Brussels have still tried to forge ahead with the proposals in giving regulators greater power to decide the fates of banks.

Naturally, the financial industry has greatly opposed the proposals and this month, the president of the European Banking Federation and chief executive of Société Générale, Frédéric Oudéa wrote to the FT to explain how "if we are not careful, then these proposals would have the potential to damage banks' ability to undertake market-making and provide other services in support of their corporate clients."

Basically, the regulators could inadvertently kill off the banks anyway because the amount of restrictions proposed on them regarding "risky" investments means that the lenders wouldn't make as much money and therefore lose their clients and shareholders.